An early Christmas gift from the Court of Appeal: more guidance on pay less notices

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Summary: In Harding v Paice [2015] the Court of Appeal has considered the tension created by the draconian effect of a party’s failure to serve a valid Pay Less Notice, and the rule that a dispute cannot be referred to adjudication more than once.

In Harding v Paice [2015] the Court of Appeal has considered the tension created by the draconian effect of a party’s failure to serve a valid Pay Less Notice, and the rule that a dispute cannot be referred to adjudication more than once.

In promoting cash flow in the construction industry, the Housing Grants, Construction and Regeneration Act 1996 requires construction contracts to include the following:

  • An adequate mechanism for the ascertainment of sums due to the contractor and staged or periodic payments.  This includes the service of a “Payment Notice” and/or a “Pay Less Notice” by the employer in response to an application for payment, failing which the contractor will be entitled to the full amount applied for.
  • The right to refer disputes to adjudication at any time.

Adjudication being a fast-track (often labelled “quick and dirty”) process, unless the parties agree otherwise, an adjudicator’s decision is temporarily binding and a dissatisfied party can refer the dispute for final determination by the court or arbitration.  However, under paragraph 9(2) of the Scheme, a single dispute cannot be referred to adjudication more than once.

The Court of Appeal considered this rule in Harding v Paice.

The facts

Mr Harding (the contractor) was employed by Mr Paice and Ms Springall (the employers) to construct and fit-out two homes.  The contract ended acrimoniously with several adjudications, enforcement proceedings and injunctions being pursued by the parties.

When the employers did not pay Mr Harding’s post-termination final account claim, he referred the matter to adjudication (the third).  Mr Harding claimed around £400,000 on two alternative bases:

  1. The employers failed to serve a Pay Less Notice on time and so were required to pay the full amount claimed.
  2. The amount claimed was the proper valuation of the sums due to Mr Harding.

The adjudicator decided in Mr Harding’s favour on the first basis and stressed that he did not reach a decision on the second.  (Interestingly, the JCT conditions used do not expressly require the service of a Pay Less Notice in respect of a post-termination final account claim.  The adjudicator must have found that the requirement is to be implied from the Scheme.)

Dissatisfied with the outcome, the employers commenced a fourth adjudication seeking a determination of the value of the final account.  Mr Harding applied to the court for an injunction restraining the employers from pursuing that adjudication.  He claimed that the dispute was the same or substantially the same as that referred to the third adjudication.

When the court refused to grant an injunction, Mr Harding appealed on the following grounds:

  • The judge erred in construing Paragraph 9(2) of the Scheme.  The adjudicator in the fourth adjudication should have resigned because he was being asked to determine the same dispute as had been included in the Referral Notice in the third adjudication, in response to which a decision had been issued (whether it decided on that particular issue or not).
  • The judge erred in his analysis of the scope and effect of the adjudicator’s decision in the third adjudication.  Whether or not he took into account both bases on which Mr Harding’s claim was advanced, the adjudicator had reached a final decision on the sum due to Mr Harding.

The judgment

The Court of Appeal dismissed both grounds.

On the first, the Court of Appeal decided that for the purposes of the rule in Paragraph 9(2), the adjudicator being invited to resign should look at both the matters referred and the decision in the previous adjudication.

“It is quite clear … that one does not look at the dispute or disputes referred to the first adjudicator in isolation.  One must also look at what the first adjudicator actually decided…”

“Parliament cannot have intended that if a claimant refers twenty disputes or issues to adjudication but the adjudicator only decides one of those disputes or issues, future adjudication about the other matters is prohibited.”

On the second, the Court of Appeal found that the adjudicator in the third adjudication had been invited to reach a decision on two alternative bases, and reached his decision expressly on one of those (the absence of a Pay Less Notice) and not the other (the substantive valuation).  The Court of Appeal determined that the employers could refer the dispute over the substantive valuation to a fifth adjudication.

Points to note

Besides underlying the importance of serving valid and timely Pay Less Notices, this case appears to draw a distinction between the assessment of a post-termination final account claim and an interim application for payment.

The Court of Appeal noted that the judge at first instance, Mr Justice Edwards-Stuart “took a somewhat different line” in two recent cases where the same issue was considered in relation to interim valuations.  In those cases, the judge held that, in failing to serve a pay less notice in respect of an interim application, the employer is deemed to have agreed the valuation in the interim application and the adjudicator must be taken to have decided the question of the value of the work.  On that basis, the judge found that:

“this means that the employer cannot bring a second adjudication to determine the value of the work at the valuation date of the interim application in question”, although “there is nothing to prevent the employer challenging the value of the work on the next application.”

The Court of Appeal distinguished those earlier cases on the basis that they dealt with interim valuations and not the final account.   It is not clear whether it would have adopted the same approach in respect of a dispute over an interim valuation.

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